LP News Issue 12 - October 1999

See Taking Care: A supplement dedicated to people claims

Analysis of major claims

The Club has recently published its comprehensive analysis of the major claims filed by its Members between 1987 and 1997. This embraces any claim, potential claim or claim-related investigation costing more than US$100,000. Club membership accounts for 20% of the world's deep-water fleet and consequently the analysis provides a uniquely representative picture of maritime risk around the world. This analysis is the most authoritative ever conducted by the Club. It addresses data captured over ten years and is therefore statistically more significant than previous analyses. It also gives a more definitive indication of trends.

The full report is nearly 100 pages long and is an in-depth study of causation, location, risk category and ship type. Its aim is to give Members a clear perspective on the changing pattern of risk as a starting point for the development of effective loss prevention strategies. A separate digest presents the highlights and summarises the conclusions of the full report.

Some key findings

• Major claims as a percentage of all claims have grown from 64% to 72% by value in the ten years under study (although, by number, major claims represent only 2% of the total)
• Major claims are increasing in individual value but slightly reducing in number
• Cargo and personal injury claims respectively are the commonest causes of major claims
• Pollution claims have increased sharply since 1993, against the general trend
• Human error accounts for 58% of major claims
• Pilot error accounted for US$100 m third-party and collision claims during the 10 years
• 45% of personal injury claims are due to crew error but there has been a significant reduction in both their value and number
• Bulk carriers between 10,000 and 30,000 gt account for 68% of claims and 72% of their value. However structural failure on these ships is decreasing
• Although there has been a two-thirds reduction in ship failure claims during the 90s, structural failure rates are increasing on passenger and container ships
• There has been a dramatic decrease in dry bulk and crude oil claims but the value of container cargo claims has nearly doubled since 1989

A clear message

"the application of sound risk management principles could do much to reduce the incidence of claims"

A clear message of the analysis is that the application of sound risk management principles could do much to reduce the incidence of claims. The analysis helps Members identify, assess and prioritise the main risks facing them so that realistic risk management plans can be formulated.

A change in risk management focus is already evident. A decade ago, loss prevention efforts focused on technical matters, such as the watertightness of hatchcovers, to the exclusion of almost everything else. Now it is generally accepted that those issues are only part of the story and that the root-cause of the great majority of claims is human error. The latest figures confirm this and make a convincing argument that education and training should be the main focus of loss prevention activity.

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Navigation and employment

Powerful dilemmas confront a master when his own nautical experience and judgement stand in conflict with his charterer's instructions. The charterer may seek to prescribe the route that should be adopted for a voyage; what happens if his instructions run contrary to the master's assessment of what is required for the safe prosecution of the voyage? This dilemma has now been considered in some depth by the English courts.

A master followed a rhumb-line route on a voyage from Vancouver to Japanese ports rather than a more northerly great circle route, having encountered typhoon conditions and suffered structural damage to his ship on an earlier great circle voyage. This was contrary to the charterer's voyage instructions. The charterer claimed as damages the costs associated with an alleged increase in the duration of the voyage and additional fuel consumed. He complained the master had failed to follow valid instructions concerning the ship's employment, contrary to the requirement of the governing charterparty. The matter was referred to arbitration and then via the High Court to the Court of Appeal in England.

The arbitrators considered that in all the circumstances of the case the master had acted unreasonably and that the shipowner had failed to meet his charterparty obligation to follow valid employment instructions from the charterer concerning the ship's employment. They also stated that the provisions of the Hague Visby Rules (Art.IV, Rule 2a) could not assist the shipowner to exclude his liability for loss or damage so arising.

The shipowner successfully appealed to the High Court. There the judge decided the instructions given by the charterer were not orders and directions for the employment of the ship but for the ship's navigation. These instructions were not valid instructions within the scope of the charterparty's employment clause.

In the Court of Appeal the charterer said the issue was not simply one of legal classification, whether the instructions were of employment or navigation; it was aquestion of fact and degree that the arbitrators had been best placed to decide. Although the court had some sympathy with the charterer's argument and indicated some of the considerations that should be borne in mind in deciding the issue, it concluded that there was a fundamental difference between an order instructing a ship to proceed to a particular place and an order prescribing the route by which it should get there. An order prescribing the route to a particular destination could not become a valid instruction as to employment simply because it was in the charterer's commercial interest for the ship to follow that course. In the absence of specific provisions in the charterparty governing or restricting the master's free ability to decide the course to be taken the court concluded that in the case in question the arbitrators had decided the matter wrongly.

In the ordinary course of things the rights and responsibilities of navigation rest with the master. It is his duty to decide, in good faith and according to his own judgement, what course should be set to prosecute the voyage as quickly as possible, bearing in mind such matters as prevailing weather conditions and other hazards to navigation. The shipowner is obliged to respond to complaints if the master is negligent or unreasonable in the exercise of his judgement and whether or not the shipowner can avoid liability for a negligent decision by the master will depend upon the existence and applicability of appropriate exemption provisions such as Art.IV, Rule 2.a of the Hague Visby Rules.

This important decision directly affects the daily occupation of mariners. It recognises a fundamental difference between 'where to go' and 'how to get there' orders and that 'how to get there' orders are not usually for the charterer to give. It insists the master must exercise his judgement carefully and reasonably or answer for the consequences of failing to do so. It also recognises the possibility of limits being imposed upon the master's freedom to decide such matters: e.g. if the charterparty specifically provided for this. It is hoped that provisions surrendering such a fundamental right would never be agreed by a shipowner.

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Under pressure

A fine in excess of US$30,000 was imposed on a ship following an incident that resulted in a small amount of lubricating oil polluting the sea near Istanbul.

The lube-oil was being transferred from drums on deck into the ship's lube-oil tanks by means of compressed air. Compressed air was introduced into the drums from the air service line, forcing the oil through a steel pipe into a flexible hose leading away to the holding tank.

The contents of three drums were successfully transferred although the barrels' top and bottom plates were heavily distorted. As operations began to transfer the contents of the fourth barrel the bottom plate detached itself from the drum under pressure and the contents of the drum were lost on deck. A small quantity found its way over the side resulting in some water pollution in the vicinity of the ship. This was reported to the authorities and the fine followed.

Tests on the fifth barrel also indicated a problem at the bottom plate seam and steps were therefore taken to transfer the contents of that barrel into the holding tank by hopper.

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Calcium hypochlorite

In July 1998 the Club was made aware of preliminary research findings in respect of high strength hydrated calcium hypochlorite (UN 2880), a commodity commonly used as a bleaching powder and in this form frequently used as a disinfecting and cleaning agent in swimming pools. It is frequently carried in large quantities as cargo in containers. The research was undertaken following a serious casualty and the findings gave rise to grave concern.

Consulting scientists had been commissioned to undertake research into the critical ignition temperature of the product; the temperature at which a runaway reaction begins, often to be followed by fire and/or explosion. Their findings indicated that for the type and size of packaging routinely used for shipment of the commodity, the critical ignition temperature might be much lower than that indicated in the IMO Dangerous Goods Code (page 5138).

They believed that in some situations the normal ambient temperatures in the holds of containerships could reach that of the commodity's critical ignition temperature, resulting in its ignition or explosion. Therefore they urgently recommended that it should not be carried in the holds but stowed on deck out of direct sunlight or away from any other heat source.

The Club has now received further advice from the consulting scientists. This indicates that the commodity's critical ignition temperature reduces as the unit size of its packaging increases. In other words, the larger the package, the lower the critical ignition temperature. This finding is still under investigation.

Until definitive results are available and until the relevant authorities have promulgated further definitive guidelines in the light of the research, the Club strongly recommends that expert advice be taken on the carriage of this commodity prior to accepting it for shipment. The Club will gladly put Members in touch directly with the consultants.

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A good record?

Following a collision between a passenger ship (P) and a bulk carrier (B) formal investigations found a failure on the part of P to maintain a proper lookout and radar watch (she failed to detect B until she was less than one mile away, two minutes before the collision). B was aware of the presence and location of P in due time. P was off B's port bow and was expected to alter course to starboard. When this action was not taken, B went hard to starboard with engines full astern. B's attempts to contact P by VHF and Aldis lamp were unsuccessful and P's course and speed were unchanged. B's action failed to avoid the collision. The investigators accordingly found that P failed to fulfil her obligations under the collision regulations to alter course to starboard. The principal criticism of B was that attempts to establish a VHF contact with P were not made earlier. Upon further inquiry by the relevant national authorities, the licenses of P's master and chief officer were suspended.

Although the formal investigations concluded that the majority of blame lay with P those reports were not admissible in court. In court, the trial judge found in favour of P on the issue of liability, with a 90/10 apportionment. He based his judgment against B upon two points. First, he decided that B's bell book and log entries had been erased and altered. Secondly he decided that it was customary for ships to pass starboard to starboard in the fairway where the collision occurred and that the ships were in fact already positioned to pass in that manner at the time of B's final manoeuvre.

The appeal court was not persuaded that starboard to starboard passing was customary in the area and referred the matter back to the trial judge for reconsideration, preventing him from basing his apportionment upon any supposed custom. The trial judge maintained his initial apportionment of liability. He considered the custom issue was not essential to his overall judgment: his view was that the ships were positioned to pass clear of each other starboard to starboard and would have done so but for B's final manoeuvre.

It appears that the judge was heavily influenced by the belief that those on board B had altered their bell book and log entries, that B had been travelling faster than stated and that the ships had already reached a clear `green to green' passing situation when B made her final manoeuvre. That consideration clearly outweighed P's failure to maintain a proper lookout and radar watch and to fulfil her obligations under the collision regulations. In consequence B was obliged to pay more than US$11.5m in damages, interest and costs.

The judgment could give the impression that maintaining neat log and bell-books is more important than maintaining a proper look out. Of course this is not the case, but it is equally important. Adverse inferences may be drawn from alterations that cast doubt on the entire account of events. It is important to know the possible consequences of failing to maintain clear, correct, unambiguous, and unaltered records, without erasures or missing pages. The ship's written records must be above reproach.

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evidence

Could you prove it?

A collision occurred during river navigation between two bulk carriers. That was perhaps the only undisputed fact of the whole casualty. The collision occurred as one ship was overtaking the other, but there was no agreement on the detailed circumstances giving rise to the manoeuvre. The liability and quantum aspects of the claim were eventually compromised but those concerned regarded the settlements as unsatisfactory though necessary to put an end to on-going expense and uncertainty.

Agreements and understanding between parties only endure whilst everything is going well. As soon as things go wrong agreements break down and self-interest kicks in. Each side regards the other with suspicion and the temptation upon individuals to tailor records or personal recollection to try to avoid blame can be intense.

You may know you are 'in the right', and that the problems arose because of the other party's fault, but how do you expect to prove it? Matters will be presented to a court or tribunal by skilled advocates who can pick upon innocent discrepancies in recollection by different individuals to make your account of events appear unbelievable.

The airline industry has 'black boxes' and cockpit voice records to assist investigators with the reconstruction of events leading up to a casualty. Could you bring forward substantial impartial evidence that would enable a clear and verifiable reconstruction of the events leading up to a serious nautical casualty?

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High cost - what gain?

Ships are frequently arrested to secure cargo claims. If the claim is for the full value of the cargo the sums of money involved will probably be millions of US dollars. Additionally, if the claim arises because the shipowner has done something that prejudices his P&I cover he will almost certainly find that the ship is subject to long delays and could even be lost to him altogether.

Claims for the full value of the cargo can arise because the cargo has been completely damaged, for example following the complete failure of a reefer ship's refrigeration plant. But damage is not the only cause of such claims; perhaps the easiest way to attract a claim for the full value of the cargo is to fail to deliver it properly. Proper delivery of cargo to the correct party is a fundamental duty of a shipowner and courts have little sympathy with those who fail. Failures can easily arise through bad commercial practice and they can all the more easily affect a shipowner who has the misfortune to fix his ship to a dishonest charterer.

A shipowner landed in serious trouble on what should have been a perfectly straightforward voyage. Unfortunately, when fixing the ship he agreed to deliver the cargo against a better of indemnity signed by the charterer alone if the bills of lading were unavailable at the port of discharge. Subsequently, at the charterer's request, the shipowner also agreed to issue a second set of original bills of lading in respect of the one cargo. Apparently this practice may be encountered quite often in some East Asian short-sea trades but it is very hazardous to a shipowner's commercial operation and survivability.

The shipowner issued a set of bills of lading for the cargo. This set went to the supplier of the cargo so that he would be able to obtain payment for the goods. Payment for the goods was to be made by the ship's charterer who was trading the cargo, selling it to an overseas buyer. The charterer required the second set of bills in order that he could obtain payment from the buyer. The reason given in support of the charterer's request for the second set of bills of lading was to prevent the buyer having access to the name of the original supplier of the goods and so being able to approach the original supplier for future dealing.

Regrettably the shipowner felt unable to insist upon the surrender of the first set of original bills of lading before issuing a second set. He was told that what he was being asked to do was quite normal and common in the trade. As it turned out he was confronted with a claim for many millions of US dollars - simply to enable the charterer to hide his supplier's name from the purchaser of the goods. The charterer gained a small benefit but a high price was paid by the shipowner.

The receiver made payment for the goods to the charterer, presumably when the charterer tendered documents including the second set of bills of lading (although the shipowner had agreed to give delivery of the cargo against the charterer's indemnity). However, the charterer failed to make payment for the goods to his supplier. The unpaid supplier still had the first set of original bills of lading, he therefore asked the shipowner to give him possession of the goods. When the shipowner was unable to meet his request, the supplier began proceedings against the shipowner for the full value of the goods. One of the first steps in those proceedings was to arrest the ship as security for the claim.

Paperwork raises important questions about expensive issues

A shipowner has little prospect of establishing any valid defence to such a claim; the holder of an original bill of lading is entitled to possession of the goods described therein. Almost certainly the shipowner would be liable to meet the claim for the full value of the goods. The best he could hope for would be to claim an indemnity from the ship's charterer, but if the charterer has been prepared to act so dishonestly it unlikely that indemnity proceedings against him in court would be very fruitful.

The fact that the cargo was delivered without presentation of the bill of lading (that is, the bill under which the claim was being pursued - in this case the original bill issued to the supplier of the goods) makes the situation worse for the shipowner. Delivery of cargo without presentation of the appropriate bill of lading prejudices the shipowner's P&I cover. Any claim upon the Club would have to be approved by the directors, which would be unlikely in such cases, and the Club's Managers would be prevented from providing security to enable the ship to be released from arrest. This is the potential cost to the shipowner of helping the charterer to hide the name of his supplier from his buyer!

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No rusty bullets

In the course of a search of a ship's accommodation by Japanese officials, a live bullet was found in a crewmember's cabin. Although it was live, it was old and rusty and was kept by the crewmember for sentimental reasons. He was nevertheless arrested for violating local firearms' regulations and sent to jail for 11 days. After 2 days he was freed following further investigation by the immigration authority and upon payment of a fine equivalent to US$1,600. He was then repatriated by the shipowners.

This incident raises interesting questions about who should bear the losses for delay suffered by the shipowner and who should bear responsibility for meeting the fine imposed upon the crewmember. The fine was imposed upon the crewmember personally in respect of his own conduct and the owner was not legally obliged to reimburse him in respect of the fine levied upon him.

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Generating expenses

A cruise ship departed for a two week Mediterranean cruise with nearly 1,000 passengers onboard. Early one evening an explosion was heard, following which all the ship's electrical power was lost. The ship's engineers discovered the aft end of No.1 turbo alternator was glowing red and sparking. Electrical power was reinstated via the ship's diesel generator and two remaining turbo alternators. The ship continued her passage under her own power to the first port of call. Unfortunately, the ship was unable to carry out repairs there because all of the port's repair facilities were occupied. The ship therefore proceeded with her passengers to an unscheduled port to effect repairs. Approval for this was obtained from the flag state authorities and the classification society.

At the port of repair shore excursions were arranged for the passengers while the true extent of the damage was assessed. It became clear that the repairs would take more than one week during which time the ship would be unable to supply full electrical services. The flag state authorities declared that the voyage could not continue with passengers on board in these circumstances. The cruise had to be cancelled and the passengers were repatriated.

The cost of refunds, repatriation expenses, excursions prior to cancellation of the voyage and small loss of enjoyment payments has been calculated to exceed US$2.25million.

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Heartbeat

Technological developments are taking place that in future should enable much better detection of stowaways. Hand held equipment has been developed that detects the electro-magnetic field generated by the human heart beat. Its ultra low frequency enables the field to pass through walls, steel, water or earth. The detector can even differentiate between adult and child.

Signum Services attended a series of controlled experiments conducted in the context of container operations. The equipment was found capable of detecting people in containers from a range of 30 metres; it could detect people in containers as they moved at normal straddle carrier speed without being misled by the fields from the hearts of the straddle carrier or crane drivers.

The equipment under test was not actually designed for the detection of stowaways or for operation in the container terminal environment; the experiments were intended to test the suitability of the technology to the problem of detecting stowaways. Consideration is now being given to the development and design of equipment that would specifically meet the needs of the industry.

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Return of stowaways - Tanzania

The Director of Immigration Services at the Tanzanian Ministry of Home Affairs has established new procedures for dealing with the return of Tanzanian stowaways. The new rules have been implemented because of incidents in which stowaways from other countries have been repatriated to Tanzania in the mistaken belief that they were Tanzanian nationals.

The new procedures will make it longer to process the documentation required in support of travel. There will also be extra costs involved - the extra costs associated with the delay as well as those associated with the new procedures.

If the number of stowaways to be returned are 5 or more the Tanzanian Immigration Officers will undertake vetting at the point of departure before travel to Tanzania is authorized. This will involve expense related to the travel of the Immigration Division's officials. If the number of stowaways is less than 5 the Immigration Division will try to locate relatives of the returnees locally in the attempt to verify their nationality prior to travel.

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new regulations

Taiwanese Maritime Code

A new Maritime Code came into force in Taiwan on July 16, 1999. A new Seaman's Law had come into effect on June 25, 1999. These two revisions replace the old code that dated back to 1931. The new code owes much to the Hague Visby liability regime in relation to the carriage of goods by sea, the York Antwerp Rules (1974) in relation to general average and the 1957 Convention in relation to limitation of liability. There are also sections dealing with maritime liens, salvage and collisions. The section dealing with masters and crews was deleted from the new code and forms the basis of the new Seaman's Law.

Claims by receivers against carriers are time-barred after one year and time extensions granted in respect of such claims are not recognised by the local courts. Local courts will assume jurisdiction over claims relating to cargo imported to or exported from Taiwan and will not give effect to arbitration clauses contained in bills of lading.

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new regulations

Russian Merchant Shipping Code

A new Merchant Shipping Code came into force in Russia on May 1, 1999 to replace the 1968 Code that was applicable in Soviet days.

In preparation for this Russia has formally acceded to the Hague Visby Rules and other international conventions including the 1962 Arrest Convention. The new code is accordingly more closely allied to international maritime law.

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new regulations

Ballast water - USA

Since July 1, 1999 all ships operating in US waters (12 mile limit) and carrying ballast water from outside the Exclusive Economic Zone (EEZ) are required to report in writing to the US Coast Guard with information on the following points: ship and voyage details; ballast water details; details of the shipowner's ballast water management plan and its implementation; the ship's ballast water tanks and sediment discharge information. Ships are also required to take precautions in accordance with voluntary guidelines laid down in the rule to minimise the uptake and the release of harmful aquatic organisms, pathogens and sediments. This interim rule was implemented on May 17, 1999 to implement the 1996 National Invasive Species Act.

The guidelines recognise the following ballast water management practices for ships: exchange of ballast water beyond the EEZ, before entering US waters; retention of ballast water onboard; alternative ballast water management programmes approved by USCG; discharge of ballast water into an approved reception facility; in extraordinary circumstances, exchange of ballast water in an area agreed to by the Captain of the Port.

USCG will monitor the ballast water management reports to assess the level of adoption of the voluntary guidelines; if the level of adoption is regarded as inadequate, they will be made mandatory.

More stringent rules apply to ships arriving in the Great Lakes and on the Hudson River, as set out in the USCG's final rules dated 8/4/93 (Ballast Water Management for Vessels Entering the Great Lakes) and 30/2/94 (Hudson River) establishing mandatory ballast water control and procedure specifically for these two areas.

Four types of ship are exempt from the rule's requirements: tankers engaged in coastal trade; passenger ships with a ballast water treatment system; USCG and Navy ships and ships that discharge their ballast water at its point of origin.

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An unhappy daughter

A company adopted the device of using a daughter company to charter in tonnage for its own commercial operations.

Cargo damage was caused on a voyage that the parent company was conducting to meet its obligations under a long-term contract of affreightment. Money was withheld under the COA in purported settlement of the claim. Amicable attempts were made to recover the amount withheld by agreement but the negotiations failed. Legal action was also considered but was impractical. It was undeniable that there was an underlying liability for the damage suffered by the cargo and the company was advised that courts in forum specified by the COA would be unsympathetic to the merits of the company's case.

The company was therefore obliged to look to the shipowner for an indemnity. The claim involved was clearly due to the unseaworthiness of the ship. Arbitration proceedings were started in the name of the daughter company against the shipowner in which an indemnity was sought under the terms of the Inter-Club Agreement which was incorporated into the charterparty with the shipowner. The attempt to win the indemnity from the shipowner failed.

The ICA contains two pre-conditions. First, that a claim should be properly settled and secondly, that cargo should be carried under a bill of lading incorporating the Hague or Hague Visby Rules (or containing terms no less favourable). If these conditions are not met the Agreement simply does not come into effect.

To succeed against the shipowner, therefore, the daughter company had to show that it had properly settled the claim which was the subject of the dispute with the shipowner. So far as the arbitrator could judge, the company that responded to the cargo claimant was the parent company _ a different legal entity to the daughter company. Even if the cargo damage claim had been properly settled by the parent company, the arbitrator still had to be convinced of the details of the internal link between the parent and daughter companies. In the event, he was not persuaded that the daughter company had in fact reimbursed the parent company in respect of the claim or that it was properly obliged to do so.

The arbitrator concluded that the daughter company had failed to show that it had properly settled the claim which was the subject of its indemnity action. It had not settled the cargo claim in the first instance or shown itself obliged to do so; the parent company had done that. Furthermore, it had not produced any persuasive evidence to show that it had properly given an indemnity to the parent company in respect of its settlement of the cargo claim. The arbitrator was clearly influenced in his decision by the absence of any documentary material establishing the formal relationship between the parent and daughter companies and clarifying their respective obligations and responsibilities in respect of the business conducted.

If a company utilises the device of daughter companies to give effect to its business operations it should ensure that those companies have and maintain a full and properly documented existence of their own. Failure to maintain your daughters properly can be costly.